IBD Editorials

Media Recast The Crisis Villains

Subprime Scandal: With the housing market crashing again, the truth is finally dawning on some media elite that Washington played a bigger role in the mortgage mess than first told.

A new book, "Reckless Endangerment," zeroes in on the corrupt partnership between Fannie Mae and Beltway insiders — who used the federally chartered firm as a giant slush fund to enrich themselves while pushing liberal housing schemes.

This may be nothing new to our readers, who have read as much on these pages from the first days of the crisis. What's surprising here is the author — a New York Times business editor. And some of her colleagues are applauding her "courage" in breaking from the tired blame-everything-on-Wall Street narrative.

Refreshingly, the lead villain in Gretchen Morgenson's book isn't Lloyd Blankfein or some other "fat cat" banker. It's ex-Fannie chairman Jim Johnson, one of many Clinton cronies who helped set the stage for the financial disaster back in the 1990s.

She blames Johnson and Fannie for fanning the easy credit flames by underwriting home loans for low-income minorities. But this is still only half the story.

The Clinton White House and Democrat Congress were obsessed with closing the racial mortgage gap, and they enlisted Fannie and its brother, Freddie Mac, in their reckless social crusade.

Fannie and Freddie didn't co-opt regulators, as the book argues. It was the other way around. Their chief regulator — HUD — pressured them to target credit-poor blacks and Hispanics with subprime loans. If they didn't meet HUD's increasing quotas, they were threatened with fines and stiffer oversight.

And Johnson's successor, Franklin Raines, did far more damage at Fannie's helm. Unlike Johnson, Raines pushed for zero down payments. He also begged mortgage bankers to originate more subprime loans so Fannie could buy them and fuel even more risky lending.

Under Raines, a Clinton appointee, Fannie loaded up on subprime securities while gutting the underwriting standards it set for the entire mortgage industry. It was under his leadership — 1999-2005 — that the bubble of making loans to people who would have a tough time paying them off got supersized.

"We have to push products and opportunities to people who have lesser credit quality," Raines exhorted mortgage bankers gathered in San Francisco in 2004.

As Clinton's old budget director, as well as an African-American, Raines agreed with his goal of putting more blacks in homes through subprime mortgages. Home ownership was "unevenly distributed in society," Raines complained, and he was fully on board government efforts to redistribute housing credit through private lenders.

As he was leaving office, Clinton, diabolical genius that he was, stacked the boards of Fannie and Freddie not only with Raines, but also with several other affordable-housing cronies to make sure the subprime fix was in at those agencies long after he was gone, and well into the Bush years.

Clinton named Rahm Emanuel to Freddie's board, along with Harold Ickes, another high-level Clinton official. They encouraged the mortgage giant to continue loosening lending standards and buying risky loans.

Meanwhile, Clinton appointed other trusted former advisers — including Jack Quinn, Eli Segal and Jamie Gorelick — to join Raines on Fannie's board, according to the book "The Great American Bank Robbery."

The Times' assistant business editor deserves cautious praise for recognizing, if belatedly, government-sponsored Fannie's role in the subprime crisis, and for finally calling it by its proper name—a Washington scandal. Still, the cover-up of what really caused the crisis goes on.

Even the Times' token conservative, David Brooks, doesn't get it. He thinks these private-public hybrids, along with industry lobbyists and community activists, conspired to force government to champion minority home ownership regardless of creditworthiness.

"These forces have overwhelmed the government," he wrote in a recent column.

In fact, starting with the Clinton administration, driving down mortgage underwriting standards in the name of "social justice" became the official policy of the U.S. government. That's the real untold story.